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Emergent BioSolutions Inc.'s (NYSE:EBS) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

·3-min read

It is hard to get excited after looking at Emergent BioSolutions' (NYSE:EBS) recent performance, when its stock has declined 11% over the past week. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Emergent BioSolutions' ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Emergent BioSolutions

How To Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Emergent BioSolutions is:

6.4% = US$97m ÷ US$1.5b (Based on the trailing twelve months to June 2022).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.06 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Emergent BioSolutions' Earnings Growth And 6.4% ROE

At first glance, Emergent BioSolutions' ROE doesn't look very promising. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 20% either. In spite of this, Emergent BioSolutions was able to grow its net income considerably, at a rate of 30% in the last five years. So, there might be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing Emergent BioSolutions' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 30% in the same period.

past-earnings-growth
past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. What is EBS worth today? The intrinsic value infographic in our free research report helps visualize whether EBS is currently mispriced by the market.

Is Emergent BioSolutions Using Its Retained Earnings Effectively?

Emergent BioSolutions doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Conclusion

On the whole, we do feel that Emergent BioSolutions has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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